Reviewed by Oct 05, 2020| Updated on
A wallflower usually sits in an unwelcome area of the industry because of the general indifference shown by traders to such stocks. Consequently, they may trade low-priced earnings (P/E) or price-to-book (P/B) ratios, generating a potential value that will shift attention towards them again at a later date.
The term 'wallflower' comes from slang for individuals who stay at a social function outside the general buzz and discussion, embracing instead of engaging with the walls.
Wallflower stocks are also sitting in the trading markets all dressed up with no place to go, waiting for investor attention, but usually not doing much to generate real interest. The lack of interest can create a snowball effect as analysts disregard the stock. Low volumes of trade lead to volatile prices and large spreads of bid-ask.
Little available information to recommend the stock from the analyst community, price, and value volatility act as a deterrent to retail investors, creating the potential for such stocks to further languish.
Although unpopular market segments are creating fertile ground for wallflowers, economic bubbles in hot market segments can be a warning sign that the hot issue today could be the wallflower of tomorrow.
Consider the dotcom bubble, during which investors almost indiscriminately threw money at Internet startups. The amount of money available for any Internet-related company has led to massive initial public offerings for businesses that at best held dubious prospects in some cases.
Among others, a sell-off among major players in the technology sector sparked by Cisco and Dell resulted in a harsh bear market for Internet stockpiles. This took the NASDAQ 15 years to recover to the high in March 2000. As investor funding dried up, many of the freshly minted dotcom companies quickly faded into a wallflower status.